ACTIVE LABOUR MARKET POLICIES AND LABOUR MARKET TRANSITIONS IN DENMARK: AN ANALYSIS OF EVENT HISTORY DATA By AGNE· LAUZADYTµ E· A dissertation submitted to the Faculty of Social Sciences, University of Aarhus in partial ful…lment of the requirements of the PhD degree in Economics and Management Table of Contents Preface v Introduction vii Summary xi Dansk Resume (Danish Summary) xiii Chapter 1 1 County, Gender and Year Specific Effects of Active Labour Market Programmes in Denmark Chapter 2 81 Unemployment, Employment and Inactivity in Denmark: an Analysis of Event History Data Chapter 3 139 Optimal Introduction Time and Length of Active Labour Market Programmes in Denmark iii Preface This thesis was written in 2004 - 2008, during my Ph.D. studies at the School of Economics and Management, University of Aarhus. I’mgrateful to the School of Economics and Management for the excellent research environment and for the …nancial support given to me for participating in courses, seminars, workshops, conferences, and for staying abroad. I received a great help from a number of people while working on this thesis and I would like to take the opportunity to thank them. First of all, I would like to thank my supervisors Michael Rosholm and Peder Pedersen. The completion of this thesis had not been possible without their advice, inspiration and support. I received many valuable comments and suggestions from the Assessment Committee con- sisting of Professor Michael Svarer, School of Economics and Management, University of Aarhus, Senior Research Fellow Knut Røed, Ragnar Frisch Centre for Economic Research, Oslo and Se- nior Researcher Tomi Kyyrä, VATT (Government Institute for Economic Research), Helsinki. I am grateful to the Committee for these comments, which are introduced into the …nal version of the thesis. During the period of November, 2007 - March, 2008 I visited Tinbergen Institute Amster- dam. I would like to thank Jaap Abbring, Gerard van den Berg, Aico van Vuuren and others for the hospitality, interesting seminars and discussions. In addition, thanks to Professor Jan van Ours for his interesting and valuable comments. I would also like to thank Birgitte Højklint Nielsen and Bibiana Paluszewska for the proof reading of the thesis, and the Ph.D. students, the Faculty members and the sta¤ at the School of Economics and Management for the nice and pleasant stay here. And …nally I would like to thank my loving family and friends for understanding and support through these years. Agne Lauzadyte, Århus, October 2008 v Introduction The unemployment rate was high in Denmark during the 1980s and beginning of the 1990s, reaching a peak in the year 1994. In the mid-1990 a comprehensive reform of Active Labour Market Policies (ALMPs) was enacted. A shift in policy priorities from passive cash support to activation of unem- ployed individuals was implemented by the reform. Since the mid-1990s the use of active labour market programmes has been further increased. The comprehensive use of ALMPs is often mentioned as one of the explanations of the favourable development in the Danish labour market. It is however a controversial issue whether this was the major reason for the decline in the unemployment rate. Most analyses on Danish data have shown that ALMPs in general have weak or counter-intuitive e¤ects; however, they agree that Private Job training shortens unemployment duration. The chapters of the thesis County, Gender and Year Speci…c E¤ects of Active Labour Mar- ket Programmes in Denmark and Optimal introduction time and length of Active Labour Market Programmes in Denmark contribute to the discussion above, and thus are intended as a joint project undertaken to estimate the impact of ALMPs on the exit rates from unemployment of the UI bene…ts recipients in Denmark. We use data extracted from an event history data set developed by the Danish National Labour Market Authority and apply the timing-of-events model introduced by Abbring & van den Berg (2003). This approach models the process of exit from unemployment into employment and the process of programme entry simultaneously in a multivariate hazard model. We estimate two separate e¤ects of the ALMPs in a duration model: a locking-in e¤ect and a post-programme e¤ect. And …nally, we calculate the net e¤ects of the ALMPs on the unemployment duration. The reform of ALMPs intended the same rules to be applied in all counties of the country. The impacts of the policies at the individual level may however di¤er among municipalities for a number of reasons; …rst, the composition of the unemployed workers may di¤er among regions. Second, the labour markets may di¤er, and some labour markets may be more sensitive to ALMPs than others. Third, the type and/or quality of courses o¤ered to unemployed workers may di¤er among counties. County, Gender and Year Speci…c E¤ects of Active Labour Market Programmes in Denmark studies the regional and annual variations in ALMP impacts, and tries to relate these di¤erences to di¤erences in vii composition, labour markets, and the characteristics of unemployment and programme use. We create 28 data sets - 14 for men and 14 for women in di¤erent Danish counties (excl. Bornholm) - for the analysis, and estimate the impact of each programme separately by counties, and for separate years within each county. Subsequently, these estimated impacts, by gender, programme, year, and county, are related to a number of explanatory variables, describing the local labour market composition, the composition of programmes, and the structure of local unemployment. This is done by the use of meta-analysis, which is a technique for analyzing and summarizing the results of di¤erent studies, each of which is focused on the same question. Estimations reveal that only Private Job training reduces unemployment duration, and we …nd a tendency that it performs better in the area around the capital. It is important to stress also that the programme has very favourable e¤ects in Northern Jutland, where the unemployment rate is one of the highest in the country. The e¤ectiveness of ALMPs in relation to men does not seem to depend neither on the composition of the work force nor on the labour market. For women, the sectoral composition does not in‡uence the e¤ect of the ALMPs, but skill composition plays a signi…cant role. The regional unemployment level does not seem to be an important factor. We also …nd a tendency for education programmes and the residual group of other ALMPs to be least e¤ective for the persons with longer unemployment durations. Besides the main goal of the ALMPs – reintegrating the long term unemployed into the labour market – there is a growing interest in preventive approaches, with activation taking place before a person becomes long term unemployed. The main problem regarding early activation is increasing costs of the programmes, since the target group of participants becomes wider, and there is the risk that the persons, who participate in the ALMPs, would have found a job anyway, i.e. the deadweight costs becomes higher. Optimal introduction time and length of Active Labour Market Programmes in Denmark examines the e¤ects of the programmes, depending on the time spent in unemployment before activation. Another goal of this chapter is to discover how the performance of the two types of ALMPs - education and Other ALMPs - varies with the length of the programmes. The activation time dependent analysis leads to a conclusion in favour of programme participation of the unemployed individuals in the second half year of the UI bene…ts spell. Very early activation is not supported by the results, while the analysis of the impact of Education and Other ALMPs depending viii on the length of the programmes …nds that only short term programmes of up to 6 weeks reduce unemployment duration. Persons over …fty are found to be the most sensitive group to the in‡uence (both positive and negative) of ALMPs, and Private Job training and the short term activation are found to be highly e¤ective in all stages of their unemployment spell. For the 30-49 years old individuals, however, the programmes are found to be ine¤ective after two years spent on UI bene…ts. Thus, the long-term unemployed in Denmark seem to have speci…c problems, which can’t be addressed by participation in the programmes. A register based sample of the labour market spells of 20-59 old individuals in a representative 1 per cent sample of the 16-70 year old Danish population in 1994 –2003 leads to the result that nearly half of the employment spells of the persons, who in the previous spell were unemployed, end in new unemployment, while those in the previous spell inactive tend to return back into inactivity. Unem- ployment, Employment and Inactivity in Denmark: an Analysis of Event History Data tackles the problem described above by employing a set of the explanatory variables representing per- sonal and geographical characteristics of the individuals, and their labour market history, and estimating their e¤ect on the labour market transitions. We use the longitudinal register-based data and estimate a discrete time hazard model for the exits from the di¤erent labour market states – unemployment, employment and inactivity – in the Danish labour market. We distinguish between the di¤erent possible destination states, adopt a competing risks formulation and run multinomial logit estimation. The estimations results show that women and elderly individuals face a higher risk of leaving the labour market and experience higher survival in both unemployment and inactivity. We also …nd un- skilled and low-educated persons, and residents of the biggest Danish cities (except the individuals over …fty), to be disadvantaged in the labour market.